Presumption of inappropriate transfer of tax losses by tax authorities

In June 2018, diverse amendments to the Federal Fiscal Code, Customs Law, Federal Criminal Code and the Law to Prevent and Sanction Crimes related to the hydrocarbons sector in Mexico were published in the Official Gazette. Among those amendments, the incorporation of Article 69-B Bis in the Federal Fiscal Code may be sensitive for many taxpayers as it gives the tax authorities the ability to presume inappropriate transfer of losses.

To prevent aggressive tax planning with losses, the Federal Fiscal Code was amended to allow the tax authorities to presume that a taxpayer is transferring losses inappropriately when based on analyses of the information obtained from their databases. This can allow them to identify whether a taxpayer that has tax losses was part of a restructure, spin off, merger or changed its shareholders to stop being part of a group.

The presumption may apply in the following cases:

• A taxpayer obtains tax losses in one of the three subsequent years to the year in which it was incorporated that are higher than its assets and that are more than 50% of its deductions that were obtained from transactions with related parties.
• A taxpayer obtains tax losses after the third year in which it was incorporated if more than 50% of the corresponding deductions were obtained from transactions with related parties and if such losses increase more than 50% than the tax losses obtained in the previous year.
• A taxpayer reduces more than 50% of its capacity to carry out business activities in subsequent years in which the tax loss was obtained as a consequence of a transfer of assets by taxpayers through a restructure, spin off, merger or sale to a related party.
• A taxpayer obtains tax losses when it sells goods and the property rights are segregated, but where such a segregation does not determine the tax cost of the assets.
• A taxpayer obtains tax losses in cases in which a modification to the methodology to deduct investments provided in the Mexican Income Tax Law can be noticed, before less than 50% of the deduction was obtained.
• A taxpayer obtains tax losses in cases in which it can be noticed that deductions were obtained related to transactions in which credit instruments are used as consideration and the payment obligation is extinguished through a different payment method than the ones included in the Mexican Income Tax Law.

If tax authorities presume that tax losses were inappropriately transferred, they must notify taxpayers via email. Taxpayers have 20 business days to provide evidence and information against the tax authorities’ arguments.

The tax authorities may request additional information to taxpayers and have a six-month term to confirm if the presumption is applicable or not.

It is also important to mention that taxpayers that are not able to prove to the tax authorities that their fiscal losses were not inappropriately transferred within the mentioned 20-day term, will be listed in a publication that the tax authorities issue on their official website as well as the in the Federation’s Official Gazette.

This publication has been highly criticised in the past, but this matter is not the subject of this article.

It should be mentioned that the Tax Ombudsman in Mexico (PRODECON) already issued criteria in regards to this inclusion of Article 69-B Bis. Such criteria refers to the fact that it is important to highlight the ability that taxpayers have to defend themselves as the objective of this article is to prevent transactions that do not have a business reason behind them and are exclusively carried out for tax avoidance.

On the “business reason” definition, PRODECON also has stated through criteria that the economic substance of the transaction has to be attended. Although the “business reason” concept is per se complex, it should not lead to uncertainty for taxpayers. Tax authorities should review the non-fiscal consequences of the transactions before making a tax analysis to determine whether the taxpayer was in fact transferring losses inappropriately.

As it can be observed, PRODECON’s position on this matter is that this new provision is not putting the taxpayer in a vulnerable position. Although the tax authorities can presume inappropriate transfer of tax losses, taxpayers have the ability to demonstrate the contrary.

We recommend that whenever a taxpayer is part of a restructure and has tax losses, they keep the supporting documentation to demonstrate the business reason for the transaction.

Santiago Llano (sllano@ritch.com.mx)

Alberto Anguiano (aanguiano@ritch.com.mx)

Ritch, Mueller, Heather y Nicolau, S.C.

www.ritch.com.mx

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